Given its volatile price swings, bitcoin might not be an ideal investment for retirement. Yet an increasing number of financial services firms now offer the option of investing in the cryptocurrency through self-directed IRA accounts. In an interview earlier this year, Bitcoin IRA, one of the earliest providers in this space, claimed that it had already signed up 4,500 people for its service.     

Jay Blaskey, the digital currency specialist from BitIRA, says they first started exploring bitcoin for retirement accounts after a 2014 IRS ruling categorizing the cryptocurrency as property. Bitcoin’s meteoric rise to mainstream traction last year brought in more customers. “That’s what crystallized customer interest into a market opportunity for us,” he says. 

The opportunity has grown in the last year. David Allen, the chief operating officer at Equity Trust – a Cleveland-based financial services firm that recently introduced bitcoin trading facility through IRA accounts for its customers, says they introduced the service due to demand. “A lot of our business is understanding what access to alternative investments our clients are looking for and is trying to react to that. In this case, the question for us was how can our firm help customers get access to cryptocurrencies,” he explains. 

But this year has been a mixed bag for bitcoin. Even as it has gained mainstream traction, the cryptocurrency’s price has crashed by more than 70 percent from the beginning of January 2018. Blaskey says their average customer type has changed from previous years. “He or she already has cryptocurrency and they are looking to take these tax-deferred funds into their retirement accounts and apply (the tax advantage) to this asset class,” he says. 

A Case of Fees

Attractive as the tax deferrals through IRA accounts are for investors, bitcoin trading through IRA is different from regular stock trading or from trading at cryptocurrency exchanges. 

In the latter case, Allen from Equity Trust argues that comparison with cryptocurrency exchanges is unfair because it’s not an apples-to-apples comparison. “Coinbase is a trading exchange, not a custodian, and they don’t provide the custody and administration services required when investing with an IRA,” he explains, adding that the most important thing for their clients is the “potential tax savings” that are possible through an IRA account. To be sure, those savings can be substantial since a capital gains tax, amounting to between 15 percent and 20 percent, may be applied to all cryptocurrency trades. 

But the benefits of trading bitcoin through a self-directed IRA account come with their own set of challenges. The most important one is the expense of added fees and risk. Because firms offering self-directed IRA services are not bound by broker fiduciary duties, investors are on the hook if they do not assess risks associated with crypto markets. 

Fees for bitcoin trading take on various forms during the investment process, from initial setup fees to custody and trading fees to annual maintenance fees. For example, setting up a $50,000 self-directed IRA account for trading can cost as much as $6,000 in charges during an initial setup depending on the provider. There are also recurring custody and maintenance fees charged by providers of such services.

Finally, each cryptocurrency trade also incurs its own set of fees from the service provider’s trading partner and custodian. For example, Equity Trust charges 3.5 percent per transaction for each purchase and 1 percent for each sale. Bitcoin IRA has a repurchasing fee of 5% and its custodian, Kingdom Trust, charges $150 per sale. Then there is the fact that premature withdrawal may also result in individuals being taxed at the rate of capital gains. Cumulatively, those fees could negate the tax advantages offered by IRA accounts. 

Why Are IRA Account Fees High For Bitcoin? 

Bitcoin’s unique requirements, such as security and custody, have bumped up fees for services offered through IRA accounts. Allen from Equity Trust adds IRS reporting requirements for directed IRA custodians to the mix. 

But individual investors can hold onto their bitcoin until retirement to get tax benefits. “Our experience has been that customers have a “buy and hold” strategy rather than trade in and out of the market based on price fluctuations,” says Allen. 

The recent entry of institutional players like Fidelity may also make a difference to the overall fee structure. “Yes, the fees are a little different from what you are used to today but, at the end of the day, the retirement industry is a $27 trillion behemoth. The moment you are able to buy it via, say, Fidelity or via Vanguard, it will lower the cost to get into the fixed asset,” explains Blaskey from BitIRA. 

Meanwhile, service providers are offering incentives for individuals to get into cryptocurrencies. Both Bitcoin IRA and BitIRA offer discounts to customers.  “We can do a deep dive and work with you,” says Blaskey. Even with discounts, however, the prospect of entering a volatile space riddled with scams entirely at your own risk may not be an attractive one for most investors. 

Blaskey makes the case that those who don’t invest in bitcoin now might miss the train. “You can jump on the train when it’s already leaving the station or you can be the person in first class, waiting for things to get going,” he says.

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.21 bitcoin and 1 Litecoin.